Table Of ContentCURRENCY POLITICS
CURRENCY
POLITICS
Te Political Economy of Exchange Rate Policy
Jeffry A. Frieden
Princeton University Press
Princeton and Oxford
Copyright © 2015 by Princeton University Press
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Library of Congress Cataloging-in-Publication Data
Frieden, Jefry A.
Currency politics : the political economy of
exchange rate policy / Jefry A. Frieden.
pages cm
Includes bibliographical references and index.
ISBN 978-0-691-16415-1 (hardcover : alk. paper) 1. Foreign exchange
rates—History. 2. Commercial policy—History. I. Title.
HG3811.F75 2015
332.4ʹ56—dc23 2014028533
British Library Cataloging- in-P ublication Data is available
Tis book has been composed in Adobe Caslon Pro
Printed on acid-f ree paper. ∞
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
CO N T EN T S
Preface vi
Acknowledgments xi
Introduction Te Political Economy of
Curency Choice 1
Chapter 1 A Teory of Currency Policy
Preferences 19
Chapter 2 Te United States:
From Greenbacks to Gold, 1862–7 9 49
Chapter 3 Te United States:
Silver Treats among the Gold, 1880–9 6 104
Chapter 4 European Monetary Integration:
From Bretton Woods to the
Euro and Beyond 137
Chapter 5 Latin American Currency Policy,
1970–2 010 186
Chapter 6 Te Political Economy of Latin
American Currency Crises 220
Chapter 7 Te Politics of Exchange Rates:
Implications and Extensions 246
Conclusions 264
References 267
Index 283
P R EFAC E
urrencies and their values are central to the world economy.
Tey afect international trade, investment, fnance, migration,
Cand travel. Te prevailing exchange rate system often defnes
the international economic order. Te gold standard, a global regime of
fxed currencies that prevailed for over forty years before 1914, was so
pivotal that the period is often known as the classical gold standard
era.1 After World War I, major governments were unable to adapt the
currency order to the changed conditions, and failed exchange rate
policies were a major reason why the interwar world economy tottered
and eventually collapsed.2
In the aftermath of World War II, the Western world organized its
economy around the Bretton Woods monetary order of fxed but ad-
justable exchange rates, with general success.3 Since the collapse of the
Bretton Woods currency system, exchange rate policies have, if any-
thing, gained in importance.
In today’s era of “globalization,” exchange rate policies have played
a major role in virtually all economies. Te European Union has for
decades attempted to stabilize the currencies of its member states,
eventually leading to the 1999 creation of a single European currency—
the euro. Although the eurozone has experienced massive difculties,
the single European currency remains a cornerstone of the most ambi-
tious attempt at international economic integration in modern history.
1 Estevadeordal, Franz, and Taylor 2003.
2 Eichengreen 1992; Bernanke and James 1991.
3 See, for example, many of the essays in Bordo and Eichengreen 1993.
Preface
Elsewhere in the rich world, currency policies and movements have
been a focus of political controversy both within and between nations.
Developing countries, too, have faced crucial decisions about their
exchange rates. Some have linked their currencies tightly to the dollar,
the euro, or other leading currencies, while others have decided to let
their currencies foat freely. Still others have made managing their cur-
rencies central to their economic strategies. Tese decisions have pow-
erfully afected subsequent economic developments. Many countries in
East Asia, in particular China, would ascribe their extraordinary eco-
nomic success at least in part to systematic policies to keep their cur-
rencies relatively weak in order to stimulate export- led economic
growth. On the other hand, currency crises have become commonplace
elsewhere in the developing world, such as Mexico in 1994, Asia in
1997–9 8, Russia in 1998, Brazil in 1999, and Argentina and Turkey in
2001. Many of these currency crises led to major economic, social, and
political upheavals. And currency policies have joined or even sup-
planted trade policies as a major source of friction among governments
in today’s globalized economy.
National and international currency relations are central features of
the world economy, and they are largely the result of government ex-
change rate policies. We cannot analyze the international trading sys-
tem without understanding national trade policies; likewise, we cannot
analyze the international monetary system without understanding na-
tional currency policies. Tis has led scholars to attempt to explain gov-
ernment policies toward their exchange rates. Such eforts of necessity
take into account both economic and political factors in the making of
currency policy.
My own interest in the political economy of exchange rate policy
dates back over twenty years. My research has emphasized how the
distributional efects of currency policies help explain why interest
groups would support or oppose particular currency measures. Almost
all economic policies create winners and losers, and currency policy is
no exception. My early work proposed simple divisions among socio-
4
economic actors, and applied them to a variety of settings. While there
are many other factors that go into the making of currency policy, from
domestic and international macroeconomic conditions to political in-
stitutions, I continue to believe that the preferences of crucial social
4 See, for example, Frieden 1991, 1994a.
viii
Preface
groups are an essential building block of any rounded explanation of
government policy, in the monetary realm as elsewhere.
Currency Politics: The Political Economy of Exchange Rate Policy ex-
pands both the theoretical and empirical reach of my scholarship on
the subject. Te theoretical principles presented here go beyond my
early ideas. I have been especially interested in incorporating further
considerations of how exchange rates afect economic agents—a con-
cern refected largely in attention to pass-t hrough: the extent to which
currency movements are transmitted to the domestic economy by way
of relative price movements. In addition, I have attempted to expand
the nuance and accuracy of the socioeconomic divisions we would ex-
pect to fnd: exporters difer among themselves, as do those with com-
mercial and fnancial interests. Other scholars have written elegantly
on similar topics, and I strive to incorporate their advances in my theo-
retical and empirical discussions.
Teoretically, this study focuses on identifying and clarifying the
distributionally motivated currency policy preferences of economic
actors—f rms, industries, and groups. It argues that characteristics of an
industry, including its exposure to exchange rate risk and the relative
price efects of exchange rate movements, determine its exchange rate
policy preferences.
Tere are two relevant dimensions of exchange rate policy choice:
the regime (fxed or foating) and level (appreciated or depreciated).
With regard to the former, I contend that actors that rely heavily on
international trade, investment, or fnancial ties will, all else being
equal, prefer a stable exchange rate—t he gold standard, fxed rates, dol-
larization, and euroization. With regard to the latter, I assert that trad-
ables producers will, all else being equal, prefer a depreciated exchange
rate. (Te opposite applies: domestically oriented actors prefer a fexible
rate and nontradables producers prefer an appreciated one.) Tese con-
cerns are strongly infuenced by the degree to which exchange rate
movements are passed through to domestic prices, which in turn is a
function of complex features of modern industries. Where pass-t hrough
is limited—t he impact of currency movements on prices is small—
concerns about exchange rate volatility rise and support for a depreci-
ated currency declines.
Empirically, I carry out a range of studies to highlight the potential
applicability of my approach across time and space. Te frst part of the
book looks at the US experience with the gold standard in the nine-
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